Introduction

Target (TGT) is another discount chain that has been benefitted by the COVID-19 pandemic as consumers flocked to the stores spending their stimulus checks from food to general merchandise. The stock has somewhat lagged the broader market (S&P 500) and its peer Walmart (WMT) which has risen 51% and 41% respectively compared to Target's gain of 16% since the March bottom. (Note that the market data is as of August 14, before the results announcement for both the companies). The primary reasons for the lag were the company's margin concerns where the operating margins dropped 400 bps in Q1 2020 as a result of inventory impairments related to the rapid slowdown in Apparel & Accessories sales and unfavorable category mix as consumers stocked up lower margin essential and food product items along with higher fulfillment costs. In contrast, Walmart reported a marginal 62 bps increase in operating costs in the same quarter on the back of better cost-containment measures.

Data by YCharts

Earnings Corner

Fast forward Q2, the company had an explosive quarter with comp sales growth of 24.5%, its best-ever reported numbers, trouncing analyst estimates pegged at 8%. While Store comparable sales jumped 10.9 percent, Digital comparable sales grew a massive 195 percent, accounting for 13.4 percentage points of Target’s comparable sales growth in line with the industry trends as consumers looked to shop more online using same-day delivery and curbside pickup. The company gained market share across all of its five merchandising categories as a result of the company's investment in omnichannel fulfillment and a broad selection of products across categories. Gross margins improved 30 bps (vs consensus estimate of 140 bps decrease) as a result of significant outperformance in the high-value consumer electronics segment.

The results we reported this morning are truly unprecedented.

- Brian Cornell, CEO Target

What was more surprising was that while most other retailers, as well as the apparel focused ones like Kohl's (KSS), reported a drop in revenue, Kohl's apparel revenues swung to a lower double-digit growth compared to a 20% decline in the first quarter. All in, this enabled the company to post an EPS of $3.38, an 86% jump from the previous quarter and well ahead of the consensus estimates pegged at around $1.60 per share.

What's Next?

Unlike other retailers that have reported recently, management noted that the trends for the third quarter remained robust with 20% comp sales growth in July and low-to-mid teens in August so far. In contrast, Walmart noted that the comp sales growth tapered off to 4% in recent months as the stimulus benefits waned. We believe the company would continue gaining market share across categories in future quarters which would aid in outperforming other retailers. The company had 10 mn new customers during the pandemic (H1 2020) and we believe the company would be able to retain the customers in the post-COVID world. We believe Target is poised to be an outperformer in the retail segment backed by market share gains, strong omnichannel capabilities, and sticky consumer base. We would recommend a Buy at current levels with a target price of $180 at 25x 1-year Forward P/E.